Recently in the investment training community, one of our colleagues posted a curious message that I couldn't miss. Our colleague, Alberto M., asked:
“What are funded accounts and how do they work?”
At that moment, in the same way that electricity flows through the wiring when we press a button to turn on the light, that question illuminated my thoughts. Faced with that question, I told Alberto that he was going to do what you are going to see below. In this investment training we are going to talk about what funded accounts are and how they work. This is how we clear Alberto's doubts and all of you who read us daily!
What are funded accounts?
Let's start this investment training by first defining what funded accounts are. Funded accounts are a service offered by particular companies that, by complying with certain rules and parameters in a test, offer retail investors the possibility of accessing accounts with funded capital. In this way, if a trader manages to pass the tests successfully, the company will provide him with an account with a sum of money (it can range from 10.000 to 200.000 in some cases).
Some platforms like FTMO allow access to a demo to test our skills. Source: FTMO.
The profits generated by the trader in charge of the account will be distributed according to the conditions established by the company, where they normally range from 50% to 90% for the trader. Each one has markets available according to their choice (currencies, stocks, indices, raw materials, cryptocurrencies...).
Who is eligible to have a funded account?
Up to this point we can think that everything looks very good, and even too good to be true. But it is, but with some conditions. Access to the tests to qualify for a funded account is free for anyone who considers that they have decent investment training to manage third-party capital in large volumes. On some platforms such as FTMO (which we will analyze in detail in this investment training) they allow us to access a free 15-day trial to test if we would be able to meet the parameters to pass the test successfully.
The test conditions vary depending on the options chosen by the trader. Source: FTMO.
But to access the official tests we will have to prepare our portfolio. Although it is true that it is free access for whoever wants, we will have to pay an amount to access said test. The prices of the tests vary depending on the amount of capital at which we are going to examine ourselves in the test.
What are the requirements to qualify for a funded account?
As we have commented in the previous paragraph, depending on the level of capital we choose, the figure and conditions to successfully pass the test may vary. Although the specific rules for the vast majority are usually the following:
Generate a minimum profit in simulation.
Obviously, if they are going to fund an account for us it will not be to go do the weekly shopping at Mercadona. Depending on the plan we choose, we will have to generate a minimum amount of profits on the simulation platform they provide us. Therefore, the larger the amount we opt for, the more benefits we will have to generate.
Metatrader 4 interface with the FTMO server with two active trades. Source: Metatrader.
Do not exceed the maximum amount of loss allowed.
As expected, there is also a limited maximum loss amount (drawdown) during the trial period. Risk management is one of the points that we always have to prioritize before thinking about profits and, in turn, one of the qualities of intelligent investors. Therefore, we must previously design a strategy so that our operations adapt to our risk management parameters to minimize risks and maximize benefits.
Explanation of drawdown or maximum loss. Source: CFA Institute Blogs.
Be consistent with the benefits.
Another of the pillars of the intelligent investor; the constancy. It will be of no use to a company to have a trader who has a profit and loss balance similar to a highway in the Swiss Alps. This definition is what is attributed to profitability, the word that allows you to build consistent profits over time. It is usually combined with a compound interest strategy, through which capital is reinvested in search of generating greater profits.
The Dow Jones Industrial Index (DJI) is the best example of constant profitability. Source: Wikipedia.
Do not exceed the number of operations allowed.
Yes, they do not usually allow exceeding a certain number of operations (sorry scalping lovers...). This is because operating in time frames such as 5 minutes or less entails a fairly high level of risk, something that precisely these companies do not want to tolerate. At the same time, we can also think that they want to limit themselves to observing the trader's analytical capacity when proposing their scenarios. This helps them determine whether they are going to fund a sophisticated investor or a kamikaze investor. Not to mention that performing many operations can develop gambling addiction, another factor that must be taken care of.
Operate during permitted days and hours.
Let's think carefully about this point because it is decisive. Companies also establish the days and times in which they are allowed to propose operations. There are even some that can also force us not to have operations in process at the close of the market or during the weekend. The options, as we have commented throughout this investment training, may vary depending on the conditions imposed by each company.
Chronology of openings and closings of the main stock exchanges in the world. Source: Forexearlywarning.
But basically these schedules are also established to maximize profits (the permitted schedules are in sessions with more volume) and at the same time, because being in charge of other people's capital is a job. It is a job, you can opt for a funded account as a hobby or to generate an extra. But with the opportunity to generate large sums of money... Why do we want to follow the routine of 8 hours of work a day unless we like our job?
How to choose a company that offers funded accounts?
There are many companies that offer tests to access a funded account. But we want to emphasize that we must be careful when choosing the platform where we are going to carry out the tests. There are hundreds of cases of people who have tested trading account funding platforms and then have not received any type of benefit. It is nothing new that where opportunities move, potential scams move, which is why we must verify in advance to avoid falling into possible fraud. The main companies that offer account funding services (best positioned and valued) are FTMO, Uprofit, OneUp Trader, Earn2Trade y TopStep. As a personal recommendation, FTMO is a good option. I tried the demo to write the post and I liked both the interface and the test conditions (they are not very complicated) and at the same time it has a good range of options and data to consult.
Example of trade balance for an account at FTMO. Source: FTMO.
Conclusions from this training in investment on funded accounts.
After completing this article on investment training in funded accounts, we can draw different conclusions. The first is the great opportunity that these companies offer to provide people with good training in investment and analysis and trading skills to have an account with decent capital to generate good returns. The second is the requirement of said tests, which clearly symbolizes the pillars to build a good trader; perseverance, profitability and discipline. Finally, giving us the opportunity to practice a profession that is extremely interesting, given that we will be constantly updated with everything that happens globally and will allow us to capitalize and continue expanding our knowledge.